Although the end of the 2024/25 tax year may still seem a little way off, December is the ideal time to reassess your pension planning strategies. Taking action now gives you the opportunity to optimise your retirement savings and minimise tax liabilities well before the 6th April deadline.
This is particularly important for doctors with incomes exceeding £100,000, you’ll start losing your personal allowance—a tax-free portion of your income. For every £2 of income above this threshold, £1 of personal allowance is lost. This creates an effective marginal tax rate of 60% on earnings between £100,000 and £125,140.
This effective rate of tax not only increases the amount of tax you pay but could also affect your tax-free childcare eligibility, adding another layer of financial pressure.
Strategic pension contributions: A smart move
One of the most effective ways to mitigate this impact is through strategic pension contributions. By contributing to your pension, you can reduce your taxable income, potentially restoring your personal allowance and maintaining eligibility for other tax benefits.
A crucial first step is performing a ‘headroom check’, which involves determining how much more you can contribute to your pension without exceeding the annual allowance. This ensures you avoid unnecessary tax charges while maximising the tax efficiency of your contributions.
With lower inflation and improved pay settlements for hospital doctors, the capacity for additional pension contributions in 2024/25 may be lower than in previous years. However, the annual allowance remains at £60,000, and with the option to carry forward unused allowances from the last three years, there are still significant opportunities to enhance your pension savings.
Upcoming changes to pensions and Inheritance Tax
Recent government announcements have confirmed that unused pension funds and death benefits will become subject to Inheritance Tax (IHT) from 6 April 2027. Despite this change, pensions remain one of the most tax-efficient ways to save.
Key benefits include:
- Tax relief on contributions at your highest marginal rate.
- Tax-free growth on private pension investments.
- A tax-free lump sum within the lump sum allowance.
Planning ahead now can help you maximise these benefits while staying prepared for future legislative changes.
Don’t forget your ISA allowance
If you’ve maximised your pension contributions, turning to your ISA allowance is a smart next step. With the £20,000 limit for the 2024/25 tax year, ISAs remain a valuable tool for tax-efficient savings. They offer tax-free growth and withdrawals, making them an excellent complement to your pension planning strategy.
Take action before 6th April
As the tax year draws to a close, now is the time to take proactive steps in your pension and tax planning. Reviewing your options early ensures you’re making the most of your allowances and minimising tax liabilities.
For tailored advice, consider speaking with a specialist financial adviser who understands the unique challenges doctors face. They can help align your pension and tax planning with your long-term financial goals, ensuring you’re on track for a secure and rewarding retirement.
Don’t leave your financial planning to the last minute—start preparing now to make the most of the opportunities available before the tax year ends.
The information provided herein is based on current tax laws and regulations, which are subject to change.
The Financial Conduct Authority (FCA) does not regulate tax advice.
Please be aware that the value of investments can fall as well as rise, so you could get back less than you invest. Past performance is not a reliable indicator of future results.
The above should not be seen as providing individual financial advice.
Content correct at time of writing.